Breaking News: Obama Cuts Taxes for Rich

President Obama promised during his campaign that he would raise taxes only on couples with income above $250,000 and singles with income over $200,000 but he never told us what he meant by income. In its 2009 Green Book, Treasury has finally filled in that blank.

The administration’s tax proposals call for hiking the top two tax rates from 33 and 35 percent to 36 and 39.6 percent and raising the threshold to get into the new 36 percent bracket. For couples, that bracket would start at $231,300 in 2009, up from $208,850; the starting point for singles would climb from $171,550 to $190,650. (The changes wouldn’t take effect until 2011 but it’s easier to use 2009 values and the basic idea is the same.)

Taxpayers with taxable income between the new and old thresholds would see their marginal tax rate fall from 33 to 28 percent. Those lucky folks would get a tax cut, unlike people with lower income, whose tax bills wouldn’t change. The cut’s not huge—not more than $1,122.50—but when you’re on the margin of being rich, every little bit helps.

But the tax cuts go beyond that. They would also go to some people in the new 36 percent bracket. The lower 28 percent rate they’d pay on some of their income would offset some or all of the tax increase from the higher 36 percent rate. Couples with taxable income as high as $268,716 would pay less income tax than under current law, as would singles with taxable in-come up to $222,480 (assuming that they aren’t on the AMT; if they are, the alternative tax denies them some or all of the tax cut).

We’ve complained that the president’s promise to protect more than 95 percent of households from a tax increase would make it hard to collect enough revenue to balance the budget. What we didn’t realize was that he planned to give tax cuts to people who live above his generously defined middle class.

13Comments

Anonymous :: 2:18 pm on May 12th, 2009:

The question is not what he will propose, but what he will VETO.
If Rangel and Baucus propose something a bit more progressive – or even much more progressive – including letting the 31% tax rate reset upon the expiration of the Bush cuts, there is really not much Obama can do about it short of vetoing the final bill.
If the TPC, Urban and Brookings feel really strongly about this then it may be necessary to step up efforts – including looking around for someone who is proposing a higher rate and providing them the information they need to justify it. If its really important to you, you can find a 501(c)(4) to advocate for a more balanced budget.
Will this be considered an electoral issue? Where is Ross Perot when we need him? As the news gets worse, I am sure someone will turn up – which will force Obama to either moderate his position or dig in his heals. Hopefully he will do the former rather than the latter. If he does the latter, it could have serious consequences for the unity of the Democratic Party, especially if the GOP continues to feed on itself. A fiscally responsible yet left libertarian movement may yet arise in this country.

Anonymous :: 6:40 pm on May 12th, 2009:

I ran the numbers on the proposed changes, and I believe that most taxpayers in the affected income range will be paying AMT. These changes will therefore have no effect on them. Only taxpayers with very low deductions for state and local taxes (e.g., Texans living in cheap houses) will see any benefit from this narrow, high-income window.
Furthermore, the benefit is relative to current law, which turns the tax clock back to 2001 in 2011. Relative to 2010 tax parameters, which is how people compare things in the real world, the 2011 proposals are still an increase.

Anonymous :: 6:59 pm on May 12th, 2009:

You're absolutely right about the AMT hitting a lot of folks in the income range that would get a regular income tax cut under the Obama plan. I acknowledged in my post the potential that AMT could wipe out any tax savings.
We haven't done new model runs to estimate the actual impact of the wider 28 percent bracket but plan to do so soon. When we have the new numbers, I'll post them on TaxVox.

Anonymous :: 10:50 pm on May 12th, 2009:

My friend has millions of cash in the CD's and her family only spend on interest, so Obama's tax raise or cut really does not matter. When he raise the tax on my friend, he would be lazier and let some of the cash sitting in money market which only making 1% interest, where as if the tax cut, he may be a bit aggressively looking for higher rate, say, 5 year CD's of 3.5%.
He said, either way, either Obama took part of his interest, or the banks. In any case, he would make sure his family spend only the interest.

Anonymous :: 11:10 pm on May 12th, 2009:

I came to see TPC's blog because one of my son's Rutgers Economic Professors came here. He did very well and got A's in both Macroeconomics and Microeconomics. He is going to follow Milton Friedman, Rutgers alumni who got Nobel Prize in Economics in 1976.
So, here is his creative idea that Obama may be able to do much better using one stone to kill two birds or more.
In stead of levy more tax from the so-called riches since any more tax seemed to create deadweight loss and it is no good idea to happen in current economic situation.
So, why not give big “deductions” to the riches, say, in 2009 or before 4-15-10? When you give the riches generous deductions during current economic situation, you will be very sure that many wealthy people will go out to spend, spend and spend, that shall generate lots of tax income and create lots of jobs.
e.g. Not long ago, I went to see Mercedez Benz dealer in Edison NJ, and I was surprized to see a brand new 2005 un sold Benz. Why not tell the riches to buy those luxury items they always enjoy, and give them some deductions, and, as you know, many parties will benefit, to the least, NJ State will collect 7% sales tax.
The problem of current economic situation is that the riches will not spend money the way they should. So, the way government can encourage them is thru tax.
When my father turned 70, and I held a birthday party at King's Chef at Woodbridge NJ, all who knows the party can come to eat free. As you can guess, the restaurant owner and waitors were much happier to see the crowd and lots of revenue, whereas, they would not be so happy to see the so-called “stimulus money”.
If you ask Ching Liang at Remax Metuchen, who got gold medal in 2006, 2007 and 2008 and top in 2009 so far of NJ, she would tell you do not send her any “stimulus money”, refer some buyers to her would be all she needs.
So, you know American needs, they do NOT need unemployment benefits, they do not need stimulus money, they do not need soup kitchen…etc. What they really need is a great way to stimulate economy that generate lots of business and jobs, and income and tips follows.
So, what is the best way to do this? Give the riches lots of incentives in 2009 or 2010 to spend lots of money, and that will automatically create lots of jobs and businesses.

Anonymous :: 3:20 am on May 17th, 2009:

The AMT precludes the savings you you say some may get by virtue of increasing the top of the 28% bracket. My tax model proves this.
The focus should be on changing the AMT to make it fair. The Obama proposal does not go far enough. Here are my thoughts on what needs to be done.
In order for the AMT to be truly indexed to inflation, the values of $150,000 in the formula for line 30 of IRS Form 6251 and the values of $175,000 and $3,500 used in the AMT tax calculations in lines 43 and 54 of Form 6251 need to be indexed for inflation from 1993, not 2009 as proposed by Mr. Obama.
Mr. Obama indexes the value of $45,000 in the formula for line 30 of IRS Form 1651 from 1993 to the tax year (e.g., from $45,000 in 1993 to $70,950 for 2009). However, he indexes the $150,000 in the same formula from 2009 to the future tax year. For apples-to-apples consistency, this $150,000 should be indexed from 1993 in the same manner as for the aforementioned $45,000 value. Likewise, the aforementioned $175,000 and $3,500 should be indexed from 1993. Actually, one could make a good argument that indexing should begin from 1986.
The reason Mr. Obama did not include proper indexing is quite apparent. It is simply the desire to keep tax revenues up by taking a big chunk out of the hide of taxpayers with taxable income between $150,000 and $434,000. Shame on him!
The AMT was originally established 40 years ago in 1969. It was established because of a potential taxpayers’ revolt due to the fact that in 1967 there were a total of 155 individuals with incomes over $200,000 who did not pay any federal income taxes and twenty of them were millionaires. In today’s dollars this $200,000 is approximately $650,000 assuming 3% inflation. As explained below, those making over $650,000 are no longer affected by the AMT.
Now let’s take a look at the AMT as proposed by Mr. Obama. The formula for line 30 of IRS Form 6251 results in an AMT exemption of $70,950 (for 2009) that begins to phase out at a taxable income of $150,000 and completely phases out at $433,800. During this phase out range ($150,000 to $433,800), the effective AMT tax rates are 32.5% and 35.0% for ordinary income. In addition, the regular tax capital gain rate of 15% is effectively between 21.5% and 22.0% and the regular tax capital gain rate of 20% is effectively between 26.5% and 27.0%, making the AMT tax larger than the regular tax. After the AMT exemption is completely phased out, these AMT tax rates are 22.5%, 25%, 15% and 20%, respectively, making the regular tax greater than the AMT.
What does this mean? This means those with taxable incomes between $150,000 and $433,800 are hit by the AMT and those with taxable incomes below $150,000 and above $433,800 are not affected by the AMT, except in extremely rare cases which I’ll not address here. In addition, marginal tax rates (as high as 41.1%) for those affected by the AMT are much higher than those not affected by the AMT. This is discrimination.
I think I understand now. Members of Congress like the AMT because they are not personally affected by AMT and the majority of voters are not affected by the AMT. Shame on them! Moreover, these same scoundrels know that the AMT will result in a windfall to the Treasury when the baby boomers have to take their Minimum Required Distributions from deferred tax plans (401k, pension, IRA, etc.) beginning in 2017 and have to pay the AMT on those distributions – thus putting these irresponsible politicians in a position to waste more taxpayers’ money. Shame, shame, shame!
I am one of those baby boomers and I do not like what I see. I plan to start a website where I inform others affected by the AMT and we will see how many of our representatives we can vote out of office. I find it ironic that the AMT was instituted to avert a taxpayer revolt and in its proposed form, the AMT is going to cause a taxpayer revolt. I find it very disingenuous for elected officials to hide behind an overly-complicated tax code and screw a selected set of individuals and small businesses. Where is the transparency? Pathetic!
The U.S. Government has been pathetic in its design of the tax code. The evolution of the tax code has resulted in a very ugly-looking beast. That is what happens when the government develops the tax code or attempts to deliver the mail. The government should do as little as possible since it only screws things up.
How is this problem fixed? An outstanding solution is to eliminate the AMT as Mr. Grassley has proposed. This would result in everyone paying taxes under the same tax structure and there not be a select group that is discriminated against. The AMT no longer even comes close to addressing its original purpose of making sure those earning above $650,000 (today’s dollars) pay taxes. Those making above $650,000 are not affected by the AMT except in rare cases.
The next best solution is to index the additional elements in the AMT calculations as I propose above.

Anonymous :: 4:31 pm on May 17th, 2009:

I find it incredible and totally irresponsible that Mr. Williams would say anything about tax savings from an increase in the top of the 28% bracket without first checking to see if the AMT eliminates these savings.

Anonymous :: 6:11 am on February 14th, 2011:

Will this be considered an electoral issue? Where is Ross Perot when we need him? As the news gets worse, I am sure someone will turn up – which will force Obama to either moderate his position or dig in his heals. Hopefully he will do the former rather than the latter.

cefaclor :: 6:12 am on February 14th, 2011:

Mr. Obama indexes the value of $45,000 in the formula for line 30 of IRS Form 1651 from 1993 to the tax year (e.g., from $45,000 in 1993 to $70,950 for 2009). However, he indexes the $150,000 in the same formula from 2009 to the future tax year. For apples-to-apples consistency, this $150,000 should be indexed from 1993 in the same manner as for the aforementioned $45,000 value. Likewise, the aforementioned $175,000 and $3,500 should be indexed from 1993. Actually, one could make a good argument that indexing should begin from 1986.

Ann Ricetta :: 8:42 am on March 14th, 2011:

My friend has millions of cash in the CD’s and her family only spend on interest, so Obama’s tax raise or cut really does not matter. When he raise the tax on my friend, he would be lazier and let some of the cash sitting in money market which only making 1% interest, where as if the tax cut, he may be a bit aggressively looking for higher rate, say, 5 year CD’s of 3.5%.
He said, either way, either Obama took part of his interest, or the banks. In any case, he would make sure his family spend only the interest.

Bez recepty :: 7:43 am on March 25th, 2011:

Taxpayers with taxable income between the new and old thresholds would see their marginal tax rate fall from 33 to 28 percent. Those lucky folks would get a tax cut, unlike people with lower income, whose tax bills wouldn’t change. The cut’s not huge—not more than $1,122.50—but when you’re on the margin of being rich, every little bit helps.

internetowa :: 7:45 am on March 25th, 2011:

The administration’s tax proposals call for hiking the top two tax rates from 33 and 35 percent to 36 and 39.6 percent and raising the threshold to get into the new 36 percent bracket. For couples, that bracket would start at $231,300 in 2009, up from $208,850; the starting point for singles would climb from $171,550 to $190,650.

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